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Punishing Success

Let’s say you worked for years to become a world class athlete. As a kid, you were in the gym while other athletes were at the movies. You were in the weight room on Saturday nights when no one else was there. You shunned pizza and soda in favor of grilled fish and fresh fruit. By the time Letterman hit the evening airwaves, you were well into restorative sleep. You were out the door for your morning runs while other athletes snoozed. As a result of all this, now you perform at an elite level and are very successful at your sport. Suddenly, you find that there are people who have a vested interest in helping you maximize your athletic potential. Your coaches, your managers, and companies who pay you to endorse their products all want to see you do your best. Why? Because doing your best helps them be more successful.

So, they provide you with all the things you need to maximize your potential. You get the best training gear and training regimens. You get the best nutrition. You get the right amount of rest. All these things help you maximize your potential. Thus the relationship is a nice symbiotic cycle – the more success you experience, the more success your coaches, managers, and endorsement companies experience. Win-win. Makes sense, right?

So, imagine the silliness if your coaches, managers, etc., made the decision that because you were so fortunate in your success that you had to “give back” almost half your resources to train the athletes who loafed, stayed out late, partied and gorged on pizza. Because you’re such a hard-working and smart athlete, you don’t need all those resources to participate adequately in your sport, they rationalize. Consequently, you don’t hit your potential, your coaches and managers don’t distinguish themselves, and endorsing companies don’t call you. You then feel that you’ve been punished for your hard work and success.

Sadly, much of our government policy falls under this flawed logic. The IRS just released their latest income tax stats for the year 2007. For that year the top 1% of earners paid 40.4% of all income taxes collected. We all know that right now we’re coming out of a recession and we really folks to invest in businesses and hire people to get the economy moving. So how do the 2007 numbers compare to, say, the 1980’s? During the ‘80’s, we managed to shake off the “stagflation” of the ‘70’s and get the economy rolling again. It was during this time that many technology juggernaut companies were spawned – Microsoft being a good example. So, how much of the income taxes in the ‘80’s were paid by the top 1% of earners? The average for the 10 years from 1980-1989 was 22.2%.

Let’s do some quick math. $1.116 trillion in income taxes was collected in 2007. Of that, $455.3 billion was paid by the top 1% of earners. If they paid 22.2% as in the ‘80’s, they would have paid $247.8 billion in taxes, and right now we’d have $207.5 billion MORE dollars invested in our economy. That would be quite a stimulus package! Our current policy punishes success and chokes off fuel from our economic engines while we’re trying to climb out of a worse recession than we had in the ‘70’s. Not smart.

Some may think that this would simply mean that our government deficit would be $207.5 billion higher. This is not the case at all. These folks that make up that top 1% didn’t get there by being lazy or not putting their money to work. I know some folks in that group, and they WANT to put their money to work! I know one gentleman who had to be told some legal docs for a deal could not be prepared over the weekend because Christmas was on that weekend. These folks are like the world class athlete I mentioned above – by and large they’re disciplined and hard-working. Their money will build new businesses and create more jobs, and the government will collect far more revenue from this new economic activity than it would give up in collections from these top 1% folks. Think about it – how many of us have ever been hired by a “poor” person? Instead of punishing economic success, we should encourage it!

Bottom line, if government policy were to make sense, it would encourage these folks to maximize their economic potential and find the correct balance of revenue to collect and yet still promote economic growth. What would we prefer? That the government collects 50% of $1 trillion or 30% of $2 trillion? Hint: 30% of $2 trillion is a WAY better deal.

At SoftLayer, we think very differently about things. We simply do not punish our customers for succeeding. We empower them to be more successful – why? Because if our customers succeed, we succeed. We get this.

Can we prove this? Perhaps a look at how customers vote with their feet is an indicator. For the past few months, SoftLayer has seen the lowest percentage of customers terminating business with us in our history. If we punished our customers for their success, they would go elsewhere.

The author apparently has a problem with tax rates in the US and uses one of the only vehicles he has available to whine about it. He then proceeds to tack on something about SL at the end to make it somewhat relevant.

Dear Gary, Don't mix politics and work. Although if you continue down this road, I fully look forward to your next awesome articles comparing softlayer to religious persecution, slavery and possibly nascar.

While I agree that it's shameful for the hardworking to work harder to subsidize laziness, I disagree with your generalization. The idea of a progressive (rather than regressive) tax is providing the opportunity to succeed to those that start off at a competitive disadvantage.

It's simply naive to imagine that the child of a single-mother in an economically depressed inner city neighborhood will achieve the same success as the child of the top 1% of the population. The same is true of a poor kid in rural Texas. Even if they put in 150% of the effort that their wealthier peer does, it is incredibly unlikely they would see as much success. People just don't start from scratch each generation, there is a mountain of historical circumstance leading up to your birth.

To return to your athlete analogy, we could just as easily compare a wealthy (though uninspired) swimmer who is lavished with the most expensive sports equipment and training to an poor kid that practices in Lake Michigan every evening. Without a coach, good nutrition, the ability to train during the winter, etc. the low income kid will never realize her potential - even if it greatly exceeds that of the wealthier kid.

Ah, the old "1% of taxpayers pay 40% of taxes" canard. Come on guys, that math is getting embarrassing. The reason the top %1 of taxpayers is paying more taxes is because the top %1 *are making so much more money* than everyone else. Its NOT because tax rates are higher.

The top tax bracket for the eighties was 50%. Today that top rate is 35%! The point is that its meaningless to talk about what the top taxpayers are contributing as an aggregate percentage. It does make sense to talk about what individuals pay relative to their income.

What it shows is simply that the top 5% of earners have seen their incomes rise much faster over the last 50 years than lower earners. THAT is the cause of the growing share of taxes paid by the top %1, NOT changes in the tax code, which in fact have been lowering the individual tax burden for top earners over the last 15 years.

Thanks for this great post. Hopefully it will make sense to a lot of people. And SoftLayer really does help business succeed! My small business has grown tremendously, entirely based on SoftLayer servers.

Nicholas, I find it very interesting that one persons "opinion" would sway you away from a great company like SoftLayer. I find it refreshing that SoftLayer allows employees to be free thinkers and have their own opinions unlike some companies that try to brainwash you with all their corporate rah rah BS. Thanks SoftLayer for being great at what you do and not being robots.

For all of you who think I'm a right wing nut, let me just say that I favor the decriminalization of drugs (though I personally don't use them), I am pro-choice, and I'm totally in favor of keeping religion out of government and politics. These are a few of my views that are opposite of the right wing.

When it comes to things like economic policy, I simply apply mathematics and basic principles anyone can get in Econ 101 class. I'd actually like to see the govt successfully raise the money to run their programs and stop the huge deficits, but they're not being smart or efficient in the way they raise money.

BTW, all the numbers above, both those that I like and dislike, come from years when Republicans held the White House.

Brian, your comments are especially thoughtful. If we just optimize the revenue collection of a progressive tax system using dynamic analysis instead of static analysis, we'll do much better. Your comments remind me of a book I recently completed - "Outliers" by Malcolm Gladwell.

Gary, a couple of things. First, the reason why the top 1% pay a higher share of the overall taxes than they did 30 years ago is because they are taking home a much higher share of the overall pie. They are actually paying a lower percentage of their income than they did in 1980 (when the top tax bracket was 50% vs 39.6 today, or cap gains rate of 20% vs. 28%). Second, Congressional Republicans traded Bill Clinton the EITC expansion for a minimum wage hike in 1993. The result is that a huge number of low income Americans now pay no taxes, because we have a minimum wage that is half of that of Australia, Germany and England (they don't make enough to pay taxes). So, the rich pay all of the taxes so Wal-Mart can pay their cashiers 6 bucks an hour. Third, if you paid aattentionin Econ 101, you might remember that deficit spending is only harmful if a). The economy is at or near full employment (where government spending crowds out private investment, or b). if there is evidence of inflationary pressure. Since unemployment is 7.5% and inflation is in check, seems like out current deficit spending is not only OK, it is the right thing to do.

The author apparently has a problem with tax rates in the US and uses one of the only vehicles he has available to whine about it. He then proceeds to tack on something about SL at the end to make it somewhat relevant.

Dear Gary, Don't mix politics and work. Although if you continue down this road, I fully look forward to your next awesome articles comparing softlayer to religious persecution, slavery and possibly nascar.

While I agree that it's shameful for the hardworking to work harder to subsidize laziness, I disagree with your generalization. The idea of a progressive (rather than regressive) tax is providing the opportunity to succeed to those that start off at a competitive disadvantage.

It's simply naive to imagine that the child of a single-mother in an economically depressed inner city neighborhood will achieve the same success as the child of the top 1% of the population. The same is true of a poor kid in rural Texas. Even if they put in 150% of the effort that their wealthier peer does, it is incredibly unlikely they would see as much success. People just don't start from scratch each generation, there is a mountain of historical circumstance leading up to your birth.

To return to your athlete analogy, we could just as easily compare a wealthy (though uninspired) swimmer who is lavished with the most expensive sports equipment and training to an poor kid that practices in Lake Michigan every evening. Without a coach, good nutrition, the ability to train during the winter, etc. the low income kid will never realize her potential - even if it greatly exceeds that of the wealthier kid.

Ah, the old "1% of taxpayers pay 40% of taxes" canard. Come on guys, that math is getting embarrassing. The reason the top %1 of taxpayers is paying more taxes is because the top %1 *are making so much more money* than everyone else. Its NOT because tax rates are higher.

The top tax bracket for the eighties was 50%. Today that top rate is 35%! The point is that its meaningless to talk about what the top taxpayers are contributing as an aggregate percentage. It does make sense to talk about what individuals pay relative to their income.

What it shows is simply that the top 5% of earners have seen their incomes rise much faster over the last 50 years than lower earners. THAT is the cause of the growing share of taxes paid by the top %1, NOT changes in the tax code, which in fact have been lowering the individual tax burden for top earners over the last 15 years.

Thanks for this great post. Hopefully it will make sense to a lot of people. And SoftLayer really does help business succeed! My small business has grown tremendously, entirely based on SoftLayer servers.

Nicholas, I find it very interesting that one persons "opinion" would sway you away from a great company like SoftLayer. I find it refreshing that SoftLayer allows employees to be free thinkers and have their own opinions unlike some companies that try to brainwash you with all their corporate rah rah BS. Thanks SoftLayer for being great at what you do and not being robots.

For all of you who think I'm a right wing nut, let me just say that I favor the decriminalization of drugs (though I personally don't use them), I am pro-choice, and I'm totally in favor of keeping religion out of government and politics. These are a few of my views that are opposite of the right wing.

When it comes to things like economic policy, I simply apply mathematics and basic principles anyone can get in Econ 101 class. I'd actually like to see the govt successfully raise the money to run their programs and stop the huge deficits, but they're not being smart or efficient in the way they raise money.

BTW, all the numbers above, both those that I like and dislike, come from years when Republicans held the White House.

Brian, your comments are especially thoughtful. If we just optimize the revenue collection of a progressive tax system using dynamic analysis instead of static analysis, we'll do much better. Your comments remind me of a book I recently completed - "Outliers" by Malcolm Gladwell.

Gary, a couple of things. First, the reason why the top 1% pay a higher share of the overall taxes than they did 30 years ago is because they are taking home a much higher share of the overall pie. They are actually paying a lower percentage of their income than they did in 1980 (when the top tax bracket was 50% vs 39.6 today, or cap gains rate of 20% vs. 28%). Second, Congressional Republicans traded Bill Clinton the EITC expansion for a minimum wage hike in 1993. The result is that a huge number of low income Americans now pay no taxes, because we have a minimum wage that is half of that of Australia, Germany and England (they don't make enough to pay taxes). So, the rich pay all of the taxes so Wal-Mart can pay their cashiers 6 bucks an hour. Third, if you paid aattentionin Econ 101, you might remember that deficit spending is only harmful if a). The economy is at or near full employment (where government spending crowds out private investment, or b). if there is evidence of inflationary pressure. Since unemployment is 7.5% and inflation is in check, seems like out current deficit spending is not only OK, it is the right thing to do.